The CORTEX district in St. Louis continues to attract biomedical and tech firms to the city.

Mike Hanrahan says that St. Louis is now a great story for investors.

And Hanrahan should know. He’s the senior managing director and principal for the St. Louis office of Cassidy Turley. He’s seen this Midwest city struggle during the Great Recession. And he’s seen it steadily recover since that recession ended.

Today? St. Louis still faces its challenges. But Hanrahan says that its also seeing plenty of successes.

“Several factors are behind the city’s commercial real estate recovery,” Hanrahan said. “The most important are the strong fundamentals of our market. Demand by tenants for space is strong. And occupancies and rental rates are rising. That is why investors are interested today in St. Louis.”

Big deals

Hanrahan’s optimism isn’t misplaced. The St. Louis market has seen its share of significant commercial real estate deals since 2014 began. For instance, Bamboo Equity Partners, a St. Louis-based real estate firm, recently bought two office buildings in the Creve Coeur submarket for a total of $9 million.

Then there’s the new Ikea store that is slated to open in St. Louis in the fall of 2015. The famed Swedish furniture store will open in a building in the Cortex hub, a thriving St. Louis business district devoted mainly to bioscience and technology firms.

TriStar Development has brought some good news to the area, too. The company plans to build the first new speculative industrial development in the St. Louis market since 2008. The company recently broke ground on the 672,000-square-foot development at Gateway Commerce Center in Pontoon Beach, Ill.. — part of the St. Louis market — in May.

St. Louis-based Clayco is also adding some excitement to the market, breaking ground earlier this year on the country’s first virtual-care center, a project that will rise in the St. Louis suburb of Chesterfield, Mo.

The project, being undertaken for healthcare provider Mercy, will result in a four-story 120,000-square-foot facility that will house about 300 physicians, nurses, specialists and researchers. The medical personnel here will work solely on remote patient care. Mercy refers to this type of care as telehealth, with the medical provider estimating that it will oversee more than 3 million telehealth visits during the next five years. Stations at the facility will be home to multiple screens that medical providers will access to view charts, files and other information that will help them work remotely with their patients.

Clayco expects to complete the project sometime in 2015.

“We are thrilled to be a part of this developing sector of health care and to encourage Mercy as it continues to flourish and expand,” said Kirk Warden, executive vice president at Clayco, in a written statement.

Thriving sectors

Hanrahan said that several commercial sectors are thriving today in St. Louis. Leading the way, though, is bulk industrial product, he said.

“It’s many of the same factors that are fueling the recovery here in general,” Hanrahan said. “Demand for space is high in the industrial sector. Tenant-improvement costs and re-tenanting costs are low. Rents are still 30 percent below historic norms. It is a pretty compelling sector for investors.”

The retail sector is strong, too, in the St. Louis market, Hanrahan said. As in many Midwest markets, grocery-anchored retail centers are performing especially well.

This isn’t unusual. As Hanrahan says, grocery sales are probably the retail sector least threatened by the growth of online shopping.

“People have to shop for groceries,” Hanrahan said. “Depending on your family, you might go to the grocery store once a week, twice a week. You’ll keep making those trips to the nearest grocery-anchored retail center.”

Of course, multi-family remains strong in the St. Louis area, too. Again, this is a common trend throughout the Midwest and the entire country.

In St. Louis, there hasn’t been much new construction in the multi-family market. This means that demand for existing apartment space — especially urban space in the heart of St. Louis — is strong.

At the same time, many St. Louis residents are still choosing to rent instead of to buy a single-family home. It’s also more difficult for residents to qualify for mortgage financing. These factors are leading to an increase in demand for apartment units.

“We have such a diversified economy here in St. Louis,” Hanrahan said. “That helps us. We don’t have the big ups and downs, either, when it comes to the commercial real estate market. We tend to be a steadier market. St. Louis is a great place to get solid cash-flow returns. That stability has protected us.”

Positive numbers

CBRE provided plenty of hope for the St. Louis market in the first-quarter 2014 market reports that it recently released.

The news was especially good in the industrial sector. According to CBRE, the industrial market had one of its best quarters in eight years during the first quarter of 2014. A total of 1.9 million square feet of industrial space was absorbed in the first quarter of this year, with multiple deals in the 300,000-square-foot to 550,000-square-foot range.

The industrial vacancy rate for the first quarter stood at 6.5 percent, and has declined for six of the last seven quarters. The average asking rent for industrial space in the first quarter rose to $4.23 a square foot.

CBRE found that the office market, a laggard in many Midwest cities, is actually holding steady in the St. Louis market. According to the company’s first quarter report, the vacancy rate in this market remained relatively unchanged at 16.6 percent. Average asking rents have edged higher each quarter since the third of 2013. They stood at $18.34 a square foot for the first quarter of 2014.

An industrial heavyweight

Can you guess which market ranked 16th in the United States in industrial transaction volume in 2013?

The answer, which might be a surprise to some, is St. Louis.

The truth is, St. Louis has long been a strong industrial market. And according to the latest research by Intelica CRE, St. Louis’ industrial market should be strong for years to come.

Intelica CRE earlier this year released its 2014 market outlook for the St. Louis region. Much of this report focused on the good news in the city’s industrial market.

Intelica CRE’s report says that industrial vacancy rates in 2014 should hover around 8 percent. The area doesn’t have to worry about industrial overbuilding, either. Intelica CRE reported that in 2013 a total of just 521,000 square feet of industrial space was delivered in the market. Developers started construction on just 727,000 square feet of new industrial space during the same time period.

The analysts with Intelica CRE say not to expect much more industrial building in 2014. The reason? It is significantly more expensive to build new industrial spaces. It’s more cost efficient to buy and renovate existing industrial properties. This, Intelica CRE reports, is good news for those already owning industrial properties and for prospective investors looking for industrial properties in the area.

Challenges

The most challenging sector in St. Louis remains office, as a recent report from Colliers International made clear.

First, there’s the big question: How big of an impact can one company have on a submarket’s vacancy rate? The answer, of course, depends on the size of the company. And in downtown St. Louis, few companies had as big a presence as AT&T.

So when the communications giant moved from One AT&T Center in the heart of the downtown St. Louis CBD, it left a big hole. As Colliers International reported in a recent St. Louis office report, AT&T’s move from downtown caused the office vacancy rate in the city’s CBD to jump from 11.6 percent in the fourth quarter of 2013 to 12.7 percent in the first quarter of this year.

The good news is that despite this loss the St. Louis region’s overall office vacancy stayed relatively flat on a year-over-year basis.

And Colliers has good news for brokers working the St. Louis market: It expects office leasing activity to pick up throughout the rest of 2014 and into 2015 as economic conditions in the region and the nation continue to improve.

AT&T moved its employees from the 44-story One AT&T Center on 900-928 Pine Street in downtown St. Louis to other properties across the St. Louis region, vacating about 700,000 square feet of office space in the heart of downtown. AT&T officials made the move in part because many of its employees were now working from home or remotely and it no longer needed as much central office space.

That left a hole in the CBD. But other St. Louis-area submarkets have seen their vacancy rates fall, according to Colliers. Asking rents, though, have remained mostly flat. Colliers reports that in the first quarter of 2013, asking rents in the St. Louis-area office market stood at $17.55 a square foot. They had fallen a bit, to $17.53 a square foot, at the end of the first quarter of 2014.

Colliers says that Class-A rental rates were averaging $21.38 a square foot, while Class-B rents were at $16.35 a square foot during the first quarter.